2007 ACE Conference, Toulouse

1. Increasing Early Settlement Charges for Personal Loans by OTP-Bank HungaryAbuse of Dominant Position or a Rational Business Response to a Demand Shock? 2007 ACE Conference, Toulouse Norbert Maier(London Economics) London Economics www.londecon.co.uk Toulouse 29 November 2007

2. Plan of the Talk I. Background II. Relevant Market Definition III. Market Power IV. Competition Assessment of OTP’s Action V. Conclusion Toulouse 29 November 2007

3. I. Background Toulouse 29 November 2007

4. The Case • In August 2005, OTP-Bank (Hungary) raised early settlement charges for personal loans from 5,000 HUF to 35,000 HUF (case Vj-12/2006) - a unilateral contract modification by OTP • Allegation: Abuse of dominant position by OTP - exploitative effects: OTP’s personal loan clients were prevented from switching to loans offered by rival banks on more favourable terms - exclusionary effects: OTP’s competitors potentially hurt by foreclosed access to customers Toulouse 29 November 2007

5. Loans in Hungary • Non-corporate loans → housing (mortgages) loans → consumption and other loans → restricted use loans (e.g. for cars, household appliances, etc.) → non-restricted use loans → personal loans → non-restricted use secured loans → etc. • HUF and non-HUF (EUR, CHF) based loans Toulouse 29 November 2007

6. The market for non-restricted use loans in Hungary • Personal loans and non-restricted use secured loans: 2004.03 – 2006.06 • Main facts: - steady stream for personal loans - non-restricted use secured loans launched in early 2005 - sharp increase in non-restricted use secured loans Toulouse 29 November 2007

7. Early settlement charges in Hungary in Summer 2005 • Key claim: OTP raised early settlement charges for personal loans from 5,000 HUF to 35,000 HUF in August 2005 • Early settlement charges for OTP’s main competitors (as of July-August 2005): • OTP raised its settlement charges to the level of that of some of its competitors Toulouse 29 November 2007

8. II. Relevant Market Definition Toulouse 29 November 2007

9. Relevant market definition • Demand substitution between personal and non-restricted use secured loans - switching from personal to non-restricted use secured loans (a new/improved product) - difference between the size of personal and non-restricted use secured loans • Relevant product (by GVH): personal + non-restricted use secured loans - relevant market increased by 130% over the relevant period (2004.03-2006.06) - fast growing market: 40%/yr in the 2004.03-2006.06 period 60% in the 2005.03-2006.03 period - customers under personal loan contract: potentially high switching costs • Relevant geographic area: Hungary Toulouse 29 November 2007

10. III. Market Power Toulouse 29 November 2007

11. Market Power • OTP - 30-40% in the market for the relevant product: indication of strong position in the market - fast growing market (40%/yr): actual market share not the best indicator of market power • Customers - switching costs, due to: (i) early settlement charges (and front-end costs) of new loans in the market (ii) limited transparency and information in the marketplace • Banks - each bank – regardless of its overall market share – has certain market power over its existing client base (e.g. they can increase early settlement charges) - banks are allowed to make unilateral changes to their contracts under certain conditions → such actions do not necessarily imply market power Toulouse 29 November 2007

12. IV. Competition Assessment Toulouse 29 November 2007

13. Allegation • Exploitative effects: Customers under a personal loan with OTP were prevented from switching to rival banks for more favourable refinancing loans • Exclusionary effects: competitors potentially hurt by foreclosed access to customers Toulouse 29 November 2007

14. Analysis of Potential Exploitative Effects • Legal issues - OTP complied with actual regulation as (i) unilateral contract modification under certain circumstances were permitted by law (ii) customers were informed as prescribed by law • Underlying costs - OTP’s initial fee of 5,000 HUF was a general admin fee for loan-relates issues - low demand for early settlement at the beginning - demand for early settlement took off with the appearance of non-restricted use secured loans - increased costs for OTP: (i) admin costs (ii) interest rate costs due to falling interest rates over the period • Customer switching - calculate the profitability for customer switching to alternative loans Ex.: - a personal loan of 2,000,000 HUF taken in Aug 2004 for 5 years at an APR of 25% - Aug 2005: opt. 1: stay with OTP for another 4 years opt. 2: switch to a non-restricted use secured loan with 15% APR for 10 years - profit of choosing opt 2 (using personal discount rate of 10%): 153,115 HUF (>>35,000 HUF) Toulouse 29 November 2007

15. Analysis of Potential Exclusionary Effects • Competitors are not likely to be foreclosed in a market that grew in excess of 60% a year in the relevant time period (2005.03-2006.03) Toulouse 29 November 2007

16. V. Conclusions Toulouse 29 November 2007

17. Concluding Remarks • The relevant market includes personal and non-restricted use secured loans • Market share is not the best indicator of market power in a fast growing market - each bank, regardless of its market share, has some market power over its existing client base • OTP followed sectoral regulation when increasing its early settlement charges • The sudden increase in demand for early settlements imposed high costs on OTP - OTP increased its early settlement fees (to market level) to match its increased costs - more detailed analysis of costs is needed (see The Northern Ireland PCA Banking Market Investig.) • Customers were unlikely to be deterred from switching - see Numerical example - one needs to investigate the distribution of OTP’s personal loan clients with respect to the size and the duration of the loan - exploitative effects of OTP’s action remains questionable • Exclusionary effects unlikely to be important in a fast growing market Toulouse 29 November 2007